Previous Test

6.6 Lessons learnt

How to read options:

  • When you log in to your trading platform you will see a lot of columns with listed option prices.
  • On one stock you can buy two sorts of options with different prices: calls and puts.
  • In the middle of the screen you see some fixed prices, these prices are also called strikes or strike prices.  
  • Furthermore, you see lots of different ‘expiry dates’. These are the dates the option you buy will expire. 
  • The expiry for the monthly options takes place on the third Friday of the month. 
  • One option contract, in general, has an underlying contract size of 100 shares, the premium you see in your screen you have to therefore always multiply with 100.

At the end of the contract – At the expiry date:

There are two ways in which an option can expire:

  1. Physical delivery (American style options)
  2. Cash settlement (European style options)
  • American style options can get exercised during the entire duration. 
  • Options on shares can get exercised during the duration of the option.
  • When you hold a long call option, you can exercise your right to buy the shares for the strike price of the option.
  • When you hold a long put option, you can exercise your right to sell the shares for the strike price of the option.
  • European style options can only get exercised on the day of expiration. 
  • Index options and currency options will be settled at the end of the duration in cash on the day of the expiry for the difference between the underlying strike price and the price of the underlying value. Normally this happens only with index options.
  • Cash settlement means that you will be settled in cash and you are not selling or buying the underlying value. 
  • Because an index consists of many different stocks it is impossible to deliver all these shares. 

Example

  • When you hold a long call option on the S&P500 with a strike price of 3500 and the index expires at 3700 you will be settled: 3700 – 3500 x 100 = 20.000 USD on your account minus the premium you paid initially for this call option.